How to Analyze REITs Differently from Ordinary Equities

A Canadian REIT owns income-producing property and passes most of its cash to unitholders. That structure breaks several ordinary-equity habits. EPS is distorted by fair-value gains and losses on property. Free cash flow mixes maintenance spending with acquisitions and developments. P/E is therefore often meaningless. And distributions can include a return of capital, which changes your tax picture.

This post is an analysis checklist for switching from the ordinary-equity lens. The metrics themselves are explained in valuing REITs with NAV, FFO and AFFO, What is FFO? and the REIT sector explainer; this guide links them rather than repeating them. It is educational and does not rate any REIT.

Direct answer

Swap five habits: (1) use FFO and AFFO per unit instead of EPS; (2) use NAV and the implied cap rate instead of P/E; (3) use the AFFO payout ratio instead of an earnings payout ratio; (4) use debt to gross book value and interest coverage, plus the debt maturity ladder, instead of net debt/EBITDA alone; and (5) read same-property NOI, occupancy and lease expiries instead of revenue growth. Then check how distributions are taxed.

Habit swap table

Ordinary-equity habit	Why it fails for REITs	REIT replacement	Read this
EPS and P/E	IAS 40 fair-value changes swing net income	FFO/AFFO per unit; P/FFO, P/AFFO	What is FFO?
Book value	Property at fair value is a starting point, not a market price	NAV per unit; implied cap rate	NAV, FFO, AFFO
Earnings payout ratio	Depreciation and fair-value items distort earnings	AFFO payout ratio	REIT distributions vs dividends
Revenue growth	Acquisitions inflate it	Same-property NOI growth	Organic vs acquisition growth
Net debt / EBITDA only	Asset-heavy, long-lived collateral	Debt / GBV, interest coverage, maturity ladder, fixed vs variable debt	Debt notes
Capex as one line	Maintenance vs growth matters for AFFO	Maintenance capex, leasing costs, development pipeline	Capex plans

REIT-specific questions

Question	Where to look
What property types and cities?	Portfolio section of the MD&A or AIF
How much rent rolls over in the next three years, and at what spread to market?	Lease maturity table; renewal spreads
Who are the largest tenants?	Top tenants table; customer concentration
What cap rate is used in the IFRS valuation?	Investment property note
How is the distribution taxed?	Annual tax allocation (return of capital, capital gains, other income)
Does it still qualify for the REIT exception from SIFT tax?	AIF risk factors and tax section

Tax: the ordinary-equity gap

Corporate dividends are often eligible dividends. REIT distributions are usually a mix of other income, capital gains and return of capital (ROC). ROC is not taxed when received in a taxable account but lowers your adjusted cost base. Track it in your ACB records.

Checklist

Step	Done when
Earnings metrics switched	FFO/AFFO per unit in place of EPS
NAV and implied cap rate noted	Compared with the REIT’s own IFRS cap rate
AFFO payout calculated	Distribution per unit ÷ AFFO per unit
Leverage and maturities logged	Debt/GBV, coverage, next three years of maturities
Same-property NOI trend	Four to eight quarters
Distribution tax mix saved	ROC share recorded for ACB

Go deeper

Rate moves hit REITs much like they hit utilities and pipelines; see analyzing pipelines and utilities as bond proxies for the rate-sensitivity lens.

Related reading

• Valuation for REITs: NAV, FFO, AFFO explained
• What is FFO?
• Real Estate – REITs: industry structure and how money is made
• REIT distributions vs corporate dividends

Sources

• IAS 40 Investment Property (fair-value model).
• REALPAC White Paper on Funds From Operations & Adjusted Funds From Operations for IFRS; NI 52-112 (non-GAAP disclosure).
• Income Tax Act (Canada), s.122.1 (SIFT rules and the REIT exception). Confirm current rules with the CRA.

Media credits

• Hero: “Apartment buildings viewed from High Park, 2026.jpg” by Chicken4War, CC BY-SA 4.0, via Wikimedia Commons. Cropped and resized to 1280x720. Real photograph, not AI-generated.

By Andrew · stocksummarizer.com